Should You Use Your IRA to Fund Your HSA? Pros, Cons and Expert Insights

By Amy Shepard

While not widely known, it is possible to fund a Health Savings Account (HSA) using Individual Retirement Account (IRA) assets. This strategy, known as an IRA-to-HSA rollover, comes with specific rules and may not be suitable for everyone. Let’s explore the key considerations and potential benefits of this unique financial maneuver.

Key Rules and Limitations

One-Time Opportunity: The IRS allows this rollover only once in your lifetime, so it’s crucial to carefully consider if and when to use it.

HSA-Eligible Plan Requirement: You must be enrolled in an HSA-eligible health plan to execute this rollover.

Contribution Limits: The rollover is subject to annual HSA contribution limits. For 2025, these limits are:

Individual coverage: $4,300

Family coverage: $8,550

Catch-up contribution (age 55+): Additional $1,000

No Tax Deduction: Unlike regular HSA contributions, you won’t receive a tax deduction for the rollover amount since IRA funds are typically pre-tax.

Testing Period: You must remain in an HSA-eligible plan for 12 months following the rollover. Failing to do so could result in the rollover becoming a taxable distribution.

When Might an IRA-to-HSA Rollover Make Sense?

This strategy could be beneficial in specific situations:

Limited Cash Flow: If you lack available cash to fund your HSA but have IRA assets, this rollover could help you establish an HSA balance.

Long-Term Tax-Free Growth: While you don’t get an immediate tax deduction, the funds can grow tax-free within the HSA and be withdrawn tax-free for qualified medical expenses in the future.

Maximizing Family Coverage: Those with family coverage can transfer a larger amount, potentially making the one-time rollover more impactful.

Considerations for Affluent Retirees

For most affluent retirees, an IRA-to-HSA rollover may not be the optimal choice. Here’s why:

Cash Availability: If you have cash available in savings or brokerage accounts, funding your HSA directly with after-tax money is often more advantageous.

Triple Tax Advantage: By using cash, you can take advantage of the HSA’s triple tax benefit: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses.

Execution Challenges

Implementing an IRA-to-HSA rollover can be more complex than standard transactions:

Limited Familiarity: Due to its infrequent use, some financial institutions may not have standardized forms for this process.

Manual Intervention: You might need to make phone calls and educate customer service representatives about the rollover.

Is It Worth It?

While an IRA-to-HSA rollover can be a useful tool in specific situations, it’s important to consider its limitations:

Limited Impact: Given the contribution limits, the rollover amount may not significantly offset anticipated healthcare costs in retirement, which can reach hundreds of thousands of dollars.

Opportunity Cost: Using your one-time rollover with individual coverage might not be as beneficial as waiting for a year when you have family coverage, allowing for a larger transfer.

Conclusion

The IRA-to-HSA rollover is a niche strategy that can be valuable in certain circumstances, particularly for those with limited cash flow but available IRA assets. However, for many affluent retirees, directly funding an HSA with cash often proves more advantageous. As with any financial decision, it’s crucial to consider your unique situation and consult with a financial professional before proceeding with this once-in-a-lifetime opportunity.

About the author: Amy Shepard, CFP®, RMA®, BFA

Amy Shepard is a Partner at Sensible Money, where she is dedicated to helping clients achieve the freedom to live life without financial stress. With a background in financial planning and leadership, Amy specializes in creating personalized strategies that empower individuals and families to reach their financial goals with confidence. Amy’s passion lies in simplifying complex financial concepts and guiding her clients through life’s major decisions to build a secure and fulfilling future.